Are Karyon Industries Berhad's (KLSE:KARYON) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

By
Simply Wall St
Published
November 29, 2021
KLSE:KARYON
Source: Shutterstock

With its stock down 20% over the past month, it is easy to disregard Karyon Industries Berhad (KLSE:KARYON). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study Karyon Industries Berhad's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Karyon Industries Berhad

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Karyon Industries Berhad is:

6.6% = RM7.1m ÷ RM107m (Based on the trailing twelve months to September 2021).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.07 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Karyon Industries Berhad's Earnings Growth And 6.6% ROE

At first glance, Karyon Industries Berhad's ROE doesn't look very promising. However, its ROE is similar to the industry average of 7.8%, so we won't completely dismiss the company. But then again, Karyon Industries Berhad's five year net income shrunk at a rate of 4.4%. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.

So, as a next step, we compared Karyon Industries Berhad's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 1.9% in the same period.

past-earnings-growth
KLSE:KARYON Past Earnings Growth November 30th 2021

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is KARYON fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Karyon Industries Berhad Efficiently Re-investing Its Profits?

Looking at its three-year median payout ratio of 27% (or a retention ratio of 73%) which is pretty normal, Karyon Industries Berhad's declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Karyon Industries Berhad has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we have mixed feelings about Karyon Industries Berhad. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 5 risks we have identified for Karyon Industries Berhad by visiting our risks dashboard for free on our platform here.

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